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What Apple’s dividend and buybacks mean to you

Apple has decided to give some of its cash back to investors for the first …

It's official: Apple has finally decided to do something with its growing mountain of cash. The result is not a splashy acquisition in tech, nor is Apple CEO Tim Cook buying a collection of private islands in the South Seas. Rather, the company is acting like a grown-up: Apple expects to spend about $15 billion a year on share buybacks and dividends.

None of that sounds very exciting unless you own Apple stock. If you do, you're likely applauding the company's newfound money management skills. After all, money in Apple's bank accounts is worth less to investors than cash that is being paid back directly to shareholders.

In 2011, Apple collected $519 million in interest and investment income. That's on an average cash balance of $28.4 billion and $51.2 billion in average long-term investments. And that's a whopping 0.7 percent APR, comparable to your average savings account. Returning some of that cash directly to investors gives each shareholder the power to earn greater returns on that money than Apple is doing on its own.

What's so great about dividends and buybacks?

The announced quarterly dividend of $2.65 per share works out to an annual yield of about 1.8 percent to investors. That's hardly ultra-generous, even by tech standards: Intel's yield is 3 percent today, Microsoft pays out 2.5 percent, Texas Instruments runs a 2.1 percent payout, and telecoms like Verizon and AT&T typically sport yields north of 5 percent. Rather, it's a modest dividend along the lines of IBM and Cisco, both in the general neighborhood of 1.5 percent.

As for the share buybacks, the program isn't designed to juice share prices. Instead, Apple plans to neutralize the dilution from employee stock purchase programs and equity grants.

A cynic might say that Apple's stock-based compensation forces shareholders to help out with the company's payroll costs. Buying back those shares, sometimes years later and at unpredictable prices, may not seem like a terribly efficient method of managing your expenses. At worst, these practices hide a portion of the payroll costs from the income statement and earnings-per-share calculations, shifting them to cash flow expenses that fewer investors look at.

But stock-based compensation is also a motivational tool, giving employees a sense of sharing the company's success. It's a tool in very wide use across the tech sector and elsewhere, to the point where it's harder to find a company that doesn't play these games than one that does. And now Apple is at least paying the piper, at long last. Apple hasn't repurchased a single share of its own stock since 2003. Since then, the company has recorded $5.1 billion of expenses for freshly issued shares, and that number still leaves out unexercised options.

Apple's fully diluted share count rose 0.9 percent in 2011, from 933.2 million to 941.6 million. Allocating $10 billion over three years to combat that effect will reverse some previous damage, though it's hard to say exactly how much. The effectiveness of buybacks depends on share prices on the open market, and if Apple's shares keep rising like they've been doing in recent years, this could be a wash. It's still better than doing nothing to fight dilution, of course.

The smart way out

All things considered, this is a smart and mature announcement. Shoving a $100 billion pile of cash and investments under your mattress makes you look big and rich, but doesn't help your shareholders any and only spurs endless questions about your plans.

But maybe you were hoping for a headline-making acquisition instead. Tim Cook could have chosen to buy (and still can buy) something big and strategic like T-Mobile, Netflix (full disclosure: I own Netflix shares), or Dell, but he doesn't need that kind of a headache. Just think back at mega-mergers like Hewlett-Packard and Compaq, AOL and Time Warner, or Excite/@Home. The cavalcade of horror stories is enough to give any CEO or investor nightmares.

Imagine if I was the sole investor in a company. The company makes $1. If I own the company so I own the $1. But if I take it as a dividend instead, I now have what $0.70 or so?

I disagree. It all depends on what you do with that money. Apple does nothing (but still earns a modest 0.7%). You can reinvest it and make way more than that. As a matter of fact, reinvesting all your dividends back in Apple stock is bound to give you more than 0.7%, even after getting taxed.

Imagine if I was the sole investor in a company. The company makes $1. If I own the company so I own the $1. But if I take it as a dividend instead, I now have what $0.70 or so?

I disagree. It all depends on what you do with that money. Apple does nothing (but still earns a modest 0.7%). You can reinvest it and make way more than that. As a matter of fact, reinvesting all your dividends back in Apple stock is bound to give you more than 0.7%, even after getting taxed.

You can disagree if you want. And it's more much complicated in the real world. But straight finance theory says dividends decrease shareholder wealth.

So, I think Apple said the dividend and share buyback would work out to something like a $45 billion expenditure of domestic cash over the next 4 years. That works out to something a bit less than $12 billion per year.

Apple made $31 billion in profits last year (2011). Apple's profits have increased year-over-year for quite awhile now, and 2012 looks to bring in more profits than 2011.

This means, even with the dividend and share buyback, Apple's cash hoard will still be increasing some $20 billion per year, no?!?

So, the question will still be--what will Apple do with all that cash??? Five years from now, they'll have $200 billion, instead of the $100 billion they have now!!!

From the article:Apple expects to spend about $15 billion a year on share buybacks and dividends.--Apple generates more than that in profit every year. So their cash holdings will likely continue to grow. They are not giving any of the $100 billion back they are simply slowing the future growth of their cash.

Thanks for the analysis Ars. I would say you left out a small analysis about Apple stock splitting in the future. You mention that Apple's partial plan is to neutralize dilution of the stock by employees. I would think stock split would lead Apple back to the current high outstanding stock situation. I guess that's why Apple decided not to split stock this go around.

I bought some more Apple stock Friday, so lets see where this freight train goes! I was hoping it would have split, but Its been up up all day. The real win was the stock price prices raising from $368 in Nov2011 to $593 today.

I would have like to see them announce that they were going to start Apple Studios. It would produce material for new "channels" on AppleTV. Say a Comedy Channel, a News Channel, a Music Channel and a Movie Channel. By producing fresh new content, they could break the studios and broadcasters stranglehold on content. With the money left over, they could buy the rights to the MLB, NFL, and EPL seasons for a sports channel. It would make AppleTV must see tv.

I think dividends are valuable in that they keep the company from doing stupid things with the money. Like Bing.

But outside of that, dividends are kind of irrelevant. If a stockholder wants cash, sell some shares.

Not much of a finance guy, I admit, but I've read that there are some big funds out there that require a company pay dividends if they are to invest in it. This move will open AAPL up to a different class of investors and could help drive up the value of the stock.

Imagine if I was the sole investor in a company. The company makes $1. If I own the company so I own the $1. But if I take it as a dividend instead, I now have what $0.70 or so?

I disagree. It all depends on what you do with that money. Apple does nothing (but still earns a modest 0.7%). You can reinvest it and make way more than that. As a matter of fact, reinvesting all your dividends back in Apple stock is bound to give you more than 0.7%, even after getting taxed.

You can disagree if you want. And it's more much complicated in the real world. But straight finance theory says dividends decrease shareholder wealth.

"Straight finance theory" tells you that a 0.7% yield during a period of 3% inflation is a 2.3% loss per year. Finance, at least any course taught in the last 50 years, also borrows Opportunity Cost from economics, which adds the lost profits of what you could be doing if you had the money instead of Apple. Assuming you can make the average 8% market return (nominal, because you're still losing to inflation) you're losing 7.3% per year.

However, the key takeaway is that dividend taxes are simple interest. Inflation and opportunity costs are compounded, which means the long-run advantage is in paying the dividend to the shareholders.

"After all, money in Apple's bank accounts is worth less to investors than cash that is being paid back directly to shareholders."

That's actually not true. The money is worth more if Apple keeps it.

Imagine if I was the sole investor in a company. The company makes $1. If I own the company so I own the $1. But if I take it as a dividend instead, I now have what $0.70 or so?

Apple's cash is already owned by the stockholders. A dividend just means you have to pay taxes on it.

Yet huge shareholders have been applying pressure for this to happen, pick one...

* huge shareholders feel they could do better managing the fund themselves.* huge shareholders are dim and act against their own self interest.* huge shareholders are expecting dividends to become more highly taxed and would like the money out now.* huge shareholders are expect capital gains taxes to be increased and would like share prices to rise less.* huge shareholders are concerned that the Apple cash pile is in dollar denominated investments.

You can disagree if you want. And it's more much complicated in the real world. But straight finance theory says dividends decrease shareholder wealth.

...in the short term. If you can get 4-5% (rather than the .7% Apple is getting now), it doesn't take all that many years before 30% reduction pays for itself. That pile of cash is slowly losing value -- inflation has beat .7% for the vast majority of months over the past dozen years. If Apple isn't going to invest it, they should return it to investors who will.

Imagine if I was the sole investor in a company. The company makes $1. If I own the company so I own the $1. But if I take it as a dividend instead, I now have what $0.70 or so?

I disagree. It all depends on what you do with that money. Apple does nothing (but still earns a modest 0.7%). You can reinvest it and make way more than that. As a matter of fact, reinvesting all your dividends back in Apple stock is bound to give you more than 0.7%, even after getting taxed.

You can disagree if you want. And it's more much complicated in the real world. But straight finance theory says dividends decrease shareholder wealth.

"Straight finance theory" tells you that a 0.7% yield during a period of 3% inflation is a 2.3% loss per year. Finance, at least any course taught in the last 50 years, also borrows Opportunity Cost from economics, which adds the lost profits of what you could be doing if you had the money instead of Apple. Assuming you can make the average 8% market return (nominal, because you're still losing to inflation) you're losing 7.3% per year.

However, the key takeaway is that dividend taxes are simple interest. Inflation and opportunity costs are compounded, which means the long-run advantage is in paying the dividend to the shareholders.

1. The market return is not 8% nominal. Most institutional investors target something like 2-3% real.

2. You are mixing up topics. You want do something different than Apple with the cash you own. You want to accept more risk and make a higher return. Your "opportunity cost" argument is not relevant to dividend policy. Apple could invest in higher risk investments too.

Wanting to do something different with the cash is a perfectly legitimate thing and a major reason companies pay dividends. But it's accepting higher risk that is making you more money. Not Apple paying a dividend.

You can disagree if you want. And it's more much complicated in the real world. But straight finance theory says dividends decrease shareholder wealth.

...in the short term. If you can get 4-5% (rather than the .7% Apple is getting now), it doesn't take all that many years before 30% reduction pays for itself. That pile of cash is slowly losing value -- inflation has beat .7% for the vast majority of months over the past dozen years. If Apple isn't going to invest it, they should return it to investors who will.

So we know beyond a shadow of a doubt that it is invested in Money Market funds return below inflation?

$600 shares and the dividend is $2? Is that normal? Seems low, but then I don't buy $600 shares of anything. . .

It's $2.65 paid quarterly so it's $10.60 per share per year. Using your $600 figure that's a yield of ~ 1.77% which is the 1.8% mentioned in the article. So yeah the dividend is relatively low compared to stocks like MS and TI, and the telecoms mentioned in the article, but considering the high growth returns on the stock and the fact that they haven't paid a dividend since 1995, it's pretty good news for shareholders.

The growth of the stock is high enough to drive purchases for the time being without the dividend, I think this is more of a move to return value to the board / executives who own huge numbers of shares (it just happens to also be good for outside investors). This is something Jobs likely wouldn't have allowed on his watch, but it's not necessarily a bad thing.

"After all, money in Apple's bank accounts is worth less to investors than cash that is being paid back directly to shareholders."

That's actually not true. The money is worth more if Apple keeps it.

Imagine if I was the sole investor in a company. The company makes $1. If I own the company so I own the $1. But if I take it as a dividend instead, I now have what $0.70 or so?

Apple's cash is already owned by the stockholders. A dividend just means you have to pay taxes on it.

Yet huge shareholders have been applying pressure for this to happen, pick one...

* huge shareholders feel they could do better managing the fund themselves.* huge shareholders are dim and act against their own self interest.* huge shareholders are expecting dividends to become more highly taxed and would like the money out now.* huge shareholders are expect capital gains taxes to be increased and would like share prices to rise less.* huge shareholders are concerned that the Apple cash pile is in dollar denominated investments.

are the other obvious scenarios?

Huge shareholders could not care about taxes if they are say a pension fund or if the fund is primarily held in tax free accounts.

Huge shareholders could be income funds where cash is routinely taken out of the fund by retirees.

The craziest thing about this announcement is the $100B is still sitting "under their mattress". The entire $45B plan will be paid for by future US cash earnings. That's insane! This plan doesn't even touch their existing cash pile. It just slows down their future US cash accumulation. The foreign cash accumulation will continue to rise at an alarming rate.

In the first fiscal year, Apple will spend about $10B ($2.5B per quarter) on dividends.The following 2 years Apple plans to spend $25B more on dividends ($3.12B per quarter).Over 3 years Apple plans to spend $10B on stock buy-backs ($833M per quarter).

That adds up to $3-$4 Billion per quarter.

Apple will easily earn more than $3B in US cash per quarter at the beginning of this period. And will probably be earning more than $8B per quarter in US cash by the end of this period.

With that information, Apples still has the problem of what to do with all this cash.